Last night I spotted a Financial Times headline which looked as thought it ought to have come from Greece.
Insolvency Service on verge of insolvency
However it did in fact come much nearer from home as it was the UK which is responsible for this bizarre example of the credit crunch era and an early entry to the competition for headline of 2013! But let me move onto another example of such insanity which is the way that financial markets have decoupled from real economies. This is happening in Greece right now.
Greek financial markets
If we look at the Greek equity market we see that the Athens Stock Exchange has more than doubled from its low of 471 last summer and now stands at 974. So if the pundits who argue that stock markets are prescient are correct we should be able to find signs of recovery in the Greek economy. Also her government bond market has rallied strongly with the benchmark ten-year government bond yield falling from over 30% last June to 10.74%. So there is a thought for you investment in Greek financial markets overall has been extremely profitable over the past 6/9 months.
Thus the proverbial Martian once he or she had pushed that peesky Mars Rover out of the way might reasonably expect to see signs of recovery in the Greek economy.
Greek public finances
This is the line in the sand for the bailout effort for Greece where austerity was supposed to whip her fiscal or budget deficit into shape in short order. In fact anything but has happened but this has not stopped regular cries of “victory” being emitted by those who should be ashamed of themselves. If we look at the latest numbers we see a familiar issue as my eyes immediately alighted on this bit.
the State Budget deficit for the 2 months of 2013 amounted to 813 million Euros against … the deficit of 495 million Euros for the 2 months of 2012.
Yes up is indeed the new down! They try to hide it by comparing with a target of 2630 million Euros but lets face it there have been so many targets that have come and mostly gone.
The essential problem is the collapse of tax revenue caused by the economic depression forced on Greece partly by an attempt to raise tax revenue. This is a bit like a dog chasing its tail although to be fair to dogs they usually tire of this game fairly quickly whereas those in charge of Greece do not. This is illustrated by this number below.
Tax categories showing a decrease against the target are the following:
a) the VAT, in all of its categories, by 213 million Euros or 8.1%,
So all the rises in VAT (Value Added Tax is a sales tax) have led to less revenue as Greece gives us a (presumably unintended) demonstration of the work of Arthur Laffer and his curve. Actually if we read the section again we see that this bad situation is a rose-tinted one as the phrase “against target” rears its ugly head again. You see the overall revenue target was some 14% lower than last years outcome. We could all beat a target defined like that! Well not quite all as Greece’s government and the troika have failed and as you can see they did so by a wide margin.
In fact state revenue dropped from 9.258 billion Euros in the first two months of 2012 to 8.616 billion in the same period this year.
If we move to the expenditure side we see that there has been some progress as it has been cut by 331 million Euros to 9.14 billion. The problem the more thoughtful immediately face is that such “success” is yet another contractionary influence on the Greek economy.
Also looking into the detail tax refunds seem to have dropped by an inordinate amount (from 331 million to 96 million) and I hope this is not yet more manipulation. Even more serious in terms of scale is the unpaid debts of the Greek government which for example total some 1.9 billion Euros to the pharmaceutical industry. There are estimates that they total some 8.7 billion Euros which is chilling when you consider that the revenues for January and February combined were less than that.
Actually there is a flicker of hope as all the pain has left Greece in a position where she has a small primary surplus and could therefore escape all this by leaving the Euro. Also somewhat ironically with all the spinning going on with these numbers the effect of the PSI or debt haircut meant that February was disproportionately affected.
What about her economy?
From the Greek statistics office this morning.
In the 4th Quarter of 2012 the number of unemployed amounted to 1,295,535. The unemployment rate was 26.0% compared with 24.8% in the previous quarter, and 20.7% in the corresponding quarter of 2011.
Simply horrible numbers with a fast rate of climb that speaks for itself. Sadly as we look into the detail we see even more troubling figures.
the highest unemployment rate is recorded among young people in the age group of 15-24 years (57.8%). For young females, the unemployment rate is 65.0%.
Remember European Commission President Barroso and his interest in young people? It looks hollow and shallow now.
If we now look at my leading indicator we see that as of the end of 2012 there were some 3,681.926 employed people in Greece but that the trend was definitely downwards.
The number of employed persons decreased by 1.5% compared with the previous quarter, and by 6.4% compared with the 4th Quarter of 2011.
So a fall which is substantial and steady so we have a response to the financial market optimism as our leading indicator still points downwards.
Also a debate which has arisen elsewhere is present in Greece too which is the subject of underemployment as opposed to unemployment.
The percentage of part timers who choose to work part time because they cannot find a full time job is 63.9%,
If Greece is going to grow her way out of trouble then a fall in manufacturing employment from 388,100 to 349,800 seems unlikely to help to say the least.
The falling numbers employed in manufacturing does appear to have been a prescient indicator of this.
The Production Index in Industry (IPI) in January 2013 compared with January 2012 recorded a decline of 4,8%. In January 2012, the annual rate of change of the IPI was –6,8%.
We have had what seemed shocking numbers from the UK and France over the past two days but they are minor compared to what has happened here. The underlying index where 2005=100 is at 66.3 for Greek industrial production and an even worse 63 for manufacturing.
For perspective let us go back as far as this data series will let us to a new dawn for this century where we see that Greek industrial production was at 92.9 in January 2000. So not only has it now collapsed in the Euro era we are discussing several lost decades.
Hard as I try there are no signs of hope here which if you consider the scale of the fall is extraordinary as falls on this scale tend to seed the recovery. So there has been quite an anti-achievement here as this disaster goes into the record books. As ever there is plenty of empty rhetoric from her rulers. The troika has declared this.
Greece is making significant progress in reforms
So significant that they have this to do.
additional technical work will be necessary
And in fact they have taken a break and departed from Athens, presumably incognito as the advice these days is for them to be in mufti and try to dress like the locals. My understanding is that there are quite wide differences between the troika and the Greek government as “additional technical work” goes into my financial lexicon.
Another way of considering this is to use the measures we apply to China. So if we look at electricity consumption by industry we see that it was 4.4% lower than the year before in February. If we look at credit growth we see that it was -4.9% in December according to the Bank of Greece.
There is a way out of this and it is to leave the Euro and default and devalue. Where are all those who claimed it would lead to “economic destruction” now?